Audit detection of financial statement errors: Implications for the practitioner;

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Audit Detection of Financial Statement Errors: Implications for the Practitioner1
Robert E. Hylas
Peat, Marwick, Mitchell & Co.
Financial statement errors are of great concern to the CPA and the financial executive alike. The auditor applies procedures attempting to ensure that all material errors in a client's financial statements are detected and adjusted. Numerous errors detected during an audit can increase auditing fees and be embarrassing to the financial management of a company if they result in audit adjustments. Practitioners should, whenever possible, assist management in preventing these errors which may indicate underlying weaknesses in a client's accounting systems and may cast doubt on the reliability of other financial reports prepared for internal use.
In this paper I review selected results of a study, "Audit Detection of Financial Statement Errors"2, that I co-authored with Robert H. Ashton, Associate Professor of Accounting at New York University. The study focuses on errors that led to a financial statement adjustment. It suggests certain implications for the practitioner, both for designing and applying auditing procedures, and for ways of preventing accounting errors.
Due to the study's broad scope, the results are somewhat tentative. Future research is necessary to further explore the issues and questions raised and to validate any interpretations of these findings.
Study Method
The study analyzed errors uncovered during audits by Peat, Marwick, Mitchell & Co. of different-sized companies in a variety of industries. Audit team members reported the dollar amounts and account classifications of up to five audit adjustments for each company. They were also asked to describe the circumstances that led to the discovery of each error and their perception of the underlying causes of the error, including whether they believed it was intentional. We reviewed and classified 281 adjustments reported for 152 companies. Selected results appear throughout this paper.
Auditing Implications
The study results illuminate three important issues: How auditors find errors, why they occur, and where they occur. The most interesting result is the large number of errors found using analytical review and various "infor­mal"
audit procedures compared with the small number found by traditional
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